Republicans tease with gold standard, but idea seen full of bugs

August 26, 2012|Reuters

* Republican's gold standard return plan seen impractical

* Dollar to rise sharply in backing US money by goldreserves

* Move could draw attention on fiscal policy, gold's status

NEW YORK, Aug 26 (Reuters) - U.S. Republicans have all butguaranteed the backing of the "gold vote" this November byraising an idea that even the most bullish mainstream bullionboosters believe is unrealistic - a return to the gold standard.

Gold prices would likely surge to $10,000 an ounce, thegreenback's credibility would vanish and global superpowerswould risk a new trade war if Republicans were to restore thelink between the U.S. dollar and gold that was severed 40 yearsago.

But that isn't stopping Republicans from considering theidea, who will call for a commission to look at restoring afixed value for the dollar, according to a draft of the partyplatform to be adopted at the Republican National Conventionthat begins on Monday in Tampa, Florida.

Gold has returned to the political discourse recently withthe growing prominence of politicians like Ron Paul, thecongressman from Texas who has said that he decided to enterpolitics on the day that President Richard Nixon shut the "goldwindow" in 1971, and with the Tea Party, which helped Utah passa law last year to make gold legal tender.

But their support won't change the practical hurdles thatwould face such a wrenching shift in the currency system, onelikely to have catastrophic effects on trade and growth.

To back the U.S. monetary based currently at around $2.56trillion by the 262 million ounces of gold held by the UnitedStates government means bullion prices would soar as high as$10,000 an ounce, Capital Economics strategists said.

A sudden appreciation of the dollar's value would crush thegreenback's credibility as the world's reserve currency andseverely undermine the international trade balance.

"It is hard to conceive of the circumstances under which noone would want to hold any dollars," they said.

The World Gold Council, a trade group funded by gold miningcompanies to promote the many uses of bullion, including byinvestors, deems such a move "unlikely," citing internationaldisagreement over the converting price and the fact that annualgrowth in gold stock may not match the monetary base.

Even the Gold Anti-Trust Action Committee (GATA), a groupdedicated to exposing what its founders say is a conspiracy byWall Street banks, the Federal Reserve and others to depress theprice of gold and silver, doesn't see it happening.

At best they're hoping that the RNC will provoke an audit ofU.S. holdings, proving GATA'S claim of a conspiracy.

"It really would be something for the Republican platform tocall for a truly independent audit of the Fed and U.S. goldreserves," said GATA's chairman, Bill Murphy, a former BostonPatriots wide receiver who worked as a commodity broker on WallStreet before founding GATA in 1998.

CENBANKS STOCK UP

Despite widespread disbelief, a reintroduction of the goldstandard has gained more support in recent years amid anintensifying debate over how to tackle U.S. debt levels andspending, and increased global anxiety over the stability offiat currencies - a government-issued currency whose value isbased on the issuer's guarantee to pay the face amount ondemand.

"The idea is that it forces the U.S. to live within itsmeans," said Mark Luschini, chief investment strategist ofbroker-dealer Janney Montgomery Scott, which has around $54billion in assets under management. "Think of it as a personwith a debit card rather than a credit card. The debit cardholder can only spend to what he or she has in the bank."

Governments abroad are also renewing their interest inowning gold as part of their reserves due to economicuncertainty. World central banks as a group became net buyers in2010 after two decades of net sales. Official-sector purchase ison track to rise to a record high this year, WGC said.

The world official sector currently held about 29,500tonnes, or 17 percent of the world's above-ground stocks. Thiscompares to 19 percent held by investors and nearly half of thestocks made into gold jewelry.

REAGAN REDUX

The Republican proposal is reminiscent of a Gold Commissioncreated by President Ronald Reagan in 1981, 10 years afterPresident Richard Nixon broke the link between gold and thedollar during the 1971 oil crisis.

Reagan's commission ultimately supported the status quo,saying "restoring the gold standard does not appear to be afruitful method for dealing with the continuing problem ofinflation."

In 1973, the U.S. government raised the official dollarprice of gold to $42.22 per ounce. A year later, Americans werepermitted to own gold other than just jewelry.

The U.S. Congressional Budget Office warned on Wednesdaythat massive government spending cuts and tax hikes due nextyear will cause even worse economic damage than previouslythought if Washington fails to come up with a solution.

REAL POLITICAL MOTIVE

Instead of planning for a gold standard return, theRepublicans are trying to placate supporters at next week's RNCand to gain more firepower in the party's promoting responsibleU.S. fiscal and monetary policies in the upcoming federalelections in November, analysts said.

Minutes from the Federal Reserve's latest meeting suggeststhe U.S. central bank will adopt stimulus fairly soon unlesseconomic conditions improve dramatically. Some expect FedChairman Ben Bernanke could use his speech at the central bank'sgathering in Jackson Hole, Wyoming, at the end of this month tosend a strong message to markets.

"Examining a return to the gold standard is one avenue toshow the public and markets a level of seriousness about the U.Sdollar, monetary policy and the budget deficit," said JeffreyWright, managing director of Global Hunter Securities.